Koizumi and Merkel – the next Reagan and Thatcher?

Could the economies that missed out on the last wave of market reforms lead the world into a new market led boom?

Dateline 11 September 2005

In Japan the Prime Minister has called a snap election to gain a mandate for the world’s biggest privatisation. The opposition is calling for major tax cuts. Has the political culture of the world’s second largest economy shifted this far? Tax cuts, privatisation, and economic reform – the agenda of the 1980s has finally come to Japan.

Eight thousand miles away a social democrat government is in the final stages of decay. The woman leading the opposition is still regarded as an outsider, even in her own party, but she is promising tax cuts, and might even pursue a flat tax. After years of stagnation, is Europe’s largest economy finally catching up with new Europe’s thinking?

It is hardly surprising that Germany and Japan thought themselves immune from the last wave of market reforms. Their economies had been remarkably resilient for decades. Germany’s “social market” economy had, in practice, been one of the most capitalist in Europe. Though rife with paternalism, Japan’s economy had benefited from years of low taxes.

Both countries still have a number of huge world-dominating companies. Germany in particular has a highly successful “mittelstand” of medium-sized, often family-run, businesses. But strong paternalist traditions and a growing body of onerous business regulation have prevented both countries from competing in the faster-moving world of nimble global competition. World-beating success stories from the 50s to the 70s, Germany and Japan missed out on the global Reagan/Thatcher revolution – and have paid the price with more than a decade of stagnation.

Both economies need major shakeups. But both also have some very solid foundations, including powerful traditions of global trading, good education systems, and a strong orientation to technology. Tax reform in Germany, privatization in Japan, and a major round of deregulation in both, could launch both countries back onto the path of high growth.

For too long the world economy has depended on the US and China as its twin engines of growth. This can’t last forever. But two huge economies like Japan and German can pick up the slack if the US or China starts to falter. And just like Reagan and Thatcher, Koizumi and Merkel will probably foster imitators. A new round of market reforms, led by the countries that were left behind last time, will be good news for the whole world.

Copyright © Quentin Langley 11 September 2005

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